WORLD OF INDUSTRIES - MOTION, DRIVE & AUTOMATION 4/2017

America’s economy and

America’s economy and manufacturing sector signaling solid growth The United States contributes a lion’s share in the global economy. To understand the direction of where global economy is headed, it is important to know where the US is going. Regardless of the challenges at the domestic front along with a rapidly transforming global landscape, the United States economy is still the largest in the world. The U.S. economy represents about 20 % of total global output, and is still much larger than that of China. Moreover, according to the IMF, the U.S. has the sixth highest per capita GDP. The U.S. economy features a highly-developed and technologically-advanced manufacturing and services sector. Large U.S. corporations also play a major role on the global stage, with more than a fifth of companies on the ‘Fortune Global 500’ coming from the United States. Even though the services sector is the main engine of the economy, the U.S. also has an important manufacturing base. It is one of the largest manufacturer in the Author: Sushen Doshi, International correspondent for World-of-Industries world and a leader in higher-value industries such as automobiles, aerospace, machinery, telecommunications and chemicals. Meanwhile, agriculture represents less than 2 % of output. However, large amounts of arable land, advanced farming technology and generous government subsidies make the U.S. a exporter of food and the largest agricultural exporting country in the world. The U.S. economy maintains its powerhouse status through a combination of characteristics. The country has access to abundant natural resources and a relatively sophisticated infrastructure. It also has a large, well-educated and productive workforce, which is fully involved in a free-market and business-oriented environment. The country’s economic growth is constantly being driven forward by ongoing innovation, R&D as well as capital investment. US economic outlook for 2017 and beyond According to key economic indicators America’s economy looks healthy. GDP, which measures the nation’s production output, is expected to grow by 2.2 % in 2017, slightly better than the 2.1 % in 2016. It is projected to drop to 2.1 % in 2018 and 1.9 % in 2019. These numbers are according to the most recent economic forecasts released at the Federal Open Market Committee meeting on 14 th June, 2017. This forecasts have factored in the impact of Trump’s policies. Another important economic indicator is the unemploy- NEWS AND MARKETS

ment rate. In 2016, the U.S. had an unemployment rate of 4.7 %, in 2017 this rate has dropped to 4.3 % and is set to remain around 4.2 % by the end of 2018. That’s better than the Federal Reserve’s target of 6.7 %. Inflation is one of those factors, which can make or break a country’s economy. In 2017, U.S. inflation will be 1.6 % and is expected to increase slightly to 2.0 % in 2018. Subdued oil prices since 2014, is one of the reasons for low inflation numbers. Let’s take a look at the 4 major components that contribute largely to America’s GDP: domestic consumption, investments in businesses, government spending and foreign trade. In 2016, America’s household consumption was responsible for nearly 70 % of its GDP, investments in businesses represent 15 %, government spending at 20 % and foreign trade (exports minus imports) represent somewhere around a negative 3 to 5 % of America’s GDP. America’s domestic consumption Almost 70 % of what the U.S. produces is for its domestic consumer spending. America is fortunate to have a large domestic population with an accessible geographic location. Domestic consumption consists of both, goods and services. Goods are sub-divided into 2 components, i.e consumer durable and non-durable goods. Durable goods includes items such as automobiles, furniture etc., items that have a useful life of 3 years or more. The non-durable goods segment includes fuel, food and apparel etc. The retailing industry is a critical component of the economy since it delivers all these goods to the consumer. Investments in businesses Business investments includes purchases that companies make to produce consumer goods. These investments were roughly around 15 % of the U.S. GDP in 2016. Business investment is divided into 2 sub-components: Fixed investment and Change in private inventory. Most of fixed investment is non-residential investment, it consists of equipment, such as software, capital goods, machinery and manufacturing equipment. Change in private inventory is how much the companies add to their inventories of the goods that they plan to sell. When orders for inventories increase, it means companies receive orders for goods they don’t have in stock. They order more to have enough on hand. It’s important for companies to have enough inventory so they don’t disappoint and turn away potential customers. Therefore, an increase in private inventories contributes to GDP. A decrease in inventory orders usually means that businesses are seeing a slack in demand. As inventories build up, companies will cut back production. If it continues long enough, then employee layoffs begin. Therefore, the change in private inventories is an important component, even though it contributed less than 1 % of GDP in 2016. Imports and exports Imports and exports have opposite effects on GDP. Exports add to GDP and imports subtract. America imports more than it exports, creating a trade deficit. In 2016, America’s total trade with other countries was $ 4.9 trillion, with $ 2.2 trillion in exports and $ 2.7 trillion in imports, including both, goods and services. United States was the world’s third-largest exporter, after China and the European Union. The U.S. exports consists of goods worth $ 1.4 trillion, with the capital goods sector responsible for more than $ 500 billion. The capital goods sector consists of commercial aircrafts, industrial machines, semiconductors, telecommunication equipment, electrical and medical equipment. Apart from capital goods, U.S also exports industrial supplies, which includes chemicals, pharmaceuticals, petroleum products and plastics. Automobiles and autocomponents make up almost 10 % of all exported goods. In terms of imports, in 2016, U.S. was the world’s second-largest importer after the European Union. More than 80 % of U.S. imports are mainly capital goods, rounding off to $ 600 billion, industrial machinery and equipment worth more than $ 400 billion. Another important category for U.S imports is automotive vehicles, parts and engines, roughly around $ 350 billion. America’s manufacturing sector America’s manufacturing industry is one of the largest in the world. It produces more than 18 % of the world’s goods. That’s more than the entire economic output of Canada, Korea, or Mexico. Forecasts from leading economists suggests that America’s manufacturing sector is set increase at a faster rate than the general economy. Growth in production is expected to be around 3 % in 2017 and 2.8 % in 2018, gradually slowing down to 2.6 % in 2019 and 2 % in 2020. Manufacturing is an essential component of the GDP. It represents about 8 % of U.S. economic output in 2016, producing goods worth $ 1.4 trillion. The manufacturing industry adds a lot of value to the power of U.S. economy. Every dollar that is spent in manufacturing, in return adds around $ 1.45 in business growth in other sectors like retailing, logistics, and other business services. In terms of employment, America has more than 12 million manufacturing jobs, that’s almost 9 % of the workforce. Over the last two decades, due to high operating costs, America’s leadership position has been threatened by China. China’s low-cost factories manufacture almost 17.5 % of the world’s products. Other reasons why America’s manufacturing sector has been in relative decline is due to high labor costs, government policies which include complying with regulation costs and the high tax rates, that decrease America’s cost competitiveness. Another important reason is that other countries do better at closing bilateral free trade agreements, with lower tariffs and export duties, they manage to lower their cost of manufacturing. Drivers of growth In order to regain its position as a naturally preferred location for industrial production, America needs to focus on a few factors that can be its drivers of growth. First, increasing the labor/employee productivity, which can be done by deploying new technologies like robotics, Industry 4.0 and 3D printing. Second, by increasing production of domestic natural gas and shale oil, which will reduce the gas and oil prices, which in-turn will attract many industries as it reduces the overall cost of production. The third reason is rising wages in emerging markets. As standards of living improve throughout the world, local workers demand higher incomes, hence making some emerging markets less cost competitive as compared to America. Fourth, companies realize the need to protect homegrown intellectual property. Some countries, such as China, allow their factories to copy U.S. manufacturing processes and designs. They use this knowledge to make “knock-offs” that they can sell for less. That’s one reason some manufacturers prefer to remain in America, despite high costs. Based on surveys done by the Institute of Supply management, the ISM manufacturing index monitors employment, production, inventories, new orders and deliveries. It showcases the condition of national manufacturing sector. Driven by faster expansions in new orders, output and employment. The manufacturing index rose from 54.9 in May 2017 to 57.8 in June 2017, showcasing the best results since August 2014. As a result, the index is now way above the threshold that separates industrial expansion from contraction. The prospects for the U.S. manufacturing economy signal a solid pace of growth. The upward momentum in the manufacturing sector and strong pace of job creation point to a rebound in business activity in second half of the year. Photographs: Deutsche Messe AG z WORLDOFINDUSTRIES – MOTION, DRIVE & AUTOMATION 4/2017